22 May 2024 3 min read

What a Labour win could mean for gilts

By Alex Mack , Guy Whitby-Smith , Asset Allocation

Investors are weighing the implications for government borrowing following the UK election expected later this year. Could higher gilt yields be on the horizon?


The following is an extract from our CIO spring update.

With Labour enjoying a large lead in the polls, we believe gilt investors will increasingly pay attention to what the shadow chancellor has to say. Even though we don’t expect much extra detail between now and the election, by the time we get to polling day we expect investors to have much stronger views.

Ask investors today, “What does a Labour Party mean for the UK economy and the UK gilt market?” and you’ll probably get a version of “nothing dramatic… no more spending than the Conservatives”. But we don’t think that view can last.

Instead, we expect investors will increasingly focus on the continued political pressure to push the spending envelope higher as public dissatisfaction with UK public services rises, with the potential for upward pressure on gilt yields as a result.

That’s a lot of bonds

So does that mean whoever wins the next election could have to issue lots of bonds? Yes, but we strongly believe that the main impact of a UK government decision to spend and borrow more will primarily come via expectations for future Bank of England (BoE) rate moves.

Additionally, the maturities at which the government chooses to borrow can have a meaningful impact on the shape of the gilt curve. While the impact of declining pension fund demand for long-dated gilts and index-linked gilts has been given a lot of airtime in recent years, we think it’s worth taking a step back. Neither supply nor demand are static.


As the amount demanded by pension funds declines, the UK Debt Management Office (DMO) is constantly trying to re-assess how much demand remains and adjust issuance to match. That one-two step dance, where demand declines and the DMO reacts, might mean that supply is constantly a bit behind the curve. But we don’t think this would necessarily lead to drama in the gilt market, as long as the DMO acts responsively.

Indeed, we expect the DMO will show enough flexibility to avoid drama, and with a new chief executive – Jessica Pulay – just announced, it has a unique opportunity to convince investors of the same.

Higher but not steeper

As a result, we don’t believe that the potential for large fiscal deficits and correspondingly high gilt issuance necessarily means that relatively higher yields on longer-dated bonds (i.e. steeper yield curves) are particularly likely. Instead, as mentioned above, we believe that the main impact of more spending could come through expectations for policy easing from the BoE being pushed back.

So, as we get closer to the election, while we do expect upward pressure on gilt yields overall as investors form stronger views about what the Labour Party could mean for borrowing levels, we’re not particularly worried about steepening risk.

This will be welcome news for pension schemes, as it means that we believe the window for them to seek to take advantage of elevated bond yields is likely to remain open for a little while longer.

If you’ve enjoyed this blog post, please click here to discover more of our content that’s specifically tailored for DB schemes.

You can also sign up here to receive the latest content most relevant for you via email.

The above is an extract from our latest CIO spring update.

Alex Mack

Head of Rates and Inflation

Alex is Head of Rates and Inflation at LGIM. Alex joined LGIM in 2013 as a graduate. Alex holds an MPhil in Economics from the University of Cambridge, St Catharine’s College, and a BEconSc in Economics from Manchester University. Alex also holds the IMC.

Alex Mack

Guy Whitby-Smith

Head of Solutions Portfolio Management

Guy has overall responsibility for the Solutions Portfolio Management team, implementing and managing objective-driven investment solutions for institutional clients. Guy’s team manage LGIM’s derivative overlay, LDI and CDI portfolios including Buy and Maintain credit with over £500bn of assets under management. Guy has played a leading role in the evolution of LGIM’s Solutions business since joining as an LDI Portfolio Manager in 2014 and brings 20 years’ industry experience, with extensive investment expertise from his prior sell-side and investment advisory roles at RBS and LCP. Guy graduated from Oxford University with a first-class Master’s degree in Physics in 2002 and is a fellow of the Institute of Actuaries.

Guy Whitby-Smith

Asset Allocation

Asset Allocation team contributors


Asset Allocation